The paper presented in this seminar measures the ability of firms to play oligopoly games, and the consequences for market efficiency and carbon emissions if firms lack strategic ability and deviate from Nash-equilibrium outcomes. Making use of rich micro-level data from the Spanish electricity market, the authors show that large incumbent firms approximately offer optimal output and charge optimal prices. Smaller firms lack strategic ability and tend to „price their production out of the market“. The paper shows that this heterogeneity in strategic ability deteriorates the efficiency of carbon pricing, because the allocation of carbon abatement across firms is not optimal. The authors find that large and strategically able firms with high shares of low-carbon generation are pivotal for efficient abatement and for decreasing the sector's carbon intensity. They compute counterfactual merger cases that allow for higher carbon prices and decrease the sector's carbon intensity, at no costs for consumers.
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